Restricting Corporation Tax loss relief

At the end of last year, the government announced a reform of the loss relief applied to Corporation Tax, including loss restriction for carried-forward losses, which it anticipated would come into force on April 1 2017*.

This change affects all companies and unincorporated associations that pay Corporation Tax whenever they have a loss to carry forward, which has been generated post 1 April 2017.

The new loss restriction means that these companies will now only be able to use carried-forward losses against 50% of profits. However, this is subject to an annual allowance of £5m of profits for each standalone company or group, and so the government believes that the vast majority of companies will be unaffected by this change. A group can choose against which profits it allocates this allowance, adding greater flexibility to the scheme.

According to HMRC, the loss restriction will apply to:

Trading losses

Non-trading deficits on loan relationships

Management expenses

UK property losses

Non-trading losses on intangible fixed assets

Companies should note that both trading and non-trading profits are restricted separately, which may result in an overall restriction of more than 50%, and you should talk to your accountant or tax adviser to find out more about how the calculation and allocation of loss restriction may affect your business.

If your business ceases trading and you have unused carried-forward losses, these can be set against profits arising in the final 36 months of trading without any restriction. Any losses pre-April 2017 can only be set against profits resulting from the same trade, whilst post-April 2017 losses can be set against total profits*.

*Please note that the proposed tax changes in this article may not now take effect from the date stipulated. The usual timetable to introduce the changes into legislation has been delayed due to the unexpected General Election. Please speak with your adviser in connection with any matters contained in this article.

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